--When you select a bankruptcy attorney to be your emergency manager haven’t you already set your course?

--Meredith Whitney made one miscalculation in assuming that governments would behave like private sector companies which, when they see an unavoidable iceberg ahead, bail out. In the public sector your ship of state needs to be capsizing before you even start looking around for lifesavers.

--How does Detroit even acquire $30 billion in art? Was there a $1 billion line item in their budget for the next available Van Gogh or was this some tax scheme involving donations and deductions?

The central figure in this drama is Kevyn Orr, the state-appointed emergency manager who now is, essentially, Detroit city government. Michigan Governor Rick Snyder put Orr in charge in March, after having determined Detroit to be in a state of financial emergency and that the elected mayor and city council had no realistic plan for reform.

What’s most important to understand about Orr is that he is not from the public sector. He has an aggressive negotiating style honed in his years as a corporate bankruptcy attorney (Orr represented Chrysler in its 2009 bankruptcy). An emergency manager with a public sector background would have been more conciliatory with creditors and Detroit probably would not yet be in bankruptcy. But Snyder, himself a former tech executive, said that “Detroit can’t wait,” and more hardball private sector methods would be required. Orr has acted accordingly.

Detroit’s bankruptcy proceedings will involve a zero-sum struggle mainly among three groups: Wall Street (bond holders and bond insurers), retirees, and Orr, acting on behalf of Detroit’s 700,000 citizens. Orr believes bankruptcy is in the public interest. Detroit’s taxes are already the highest in the state, its near-term prospects for economic growth extremely weak and so, in order to free up more revenues to strengthen basic services and reinvest in the city’s future, it must cut the debt. Absent any debt restructuring, payments to retirees and bondholders will soon consume two thirds of all annual revenues.

Orr filed for bankruptcy because he got nowhere in his direct negotiations with creditors. Bankruptcy provides government with a solution to the so-called “hold out” problem. A government can't pay its debt--some creditors get that, and agree to accept less than their full claim, but not all will be willing to take one for the team. Some creditors will hold out, either because they believe their leverage will increase the more desperate the debtor becomes about settling, or they wager they may be able to avoid having their claim reduced altogether. Let the other schmucks take the haircut. Federal bankruptcy law enables a fairer and more efficient debt-adjustment process, by allowing debtors to enact reorganization plans over the objections of a minority of its creditors.

Negotiations with creditors had been rapidly deteriorating in recent weeks, with four separate lawsuits being filed over Orr's restructuring plan, one by Orr himself. The last straw came when the city’s pension boards actually threatened to sue to prevent a bankruptcy filing, resulting in a mad dash (literally) to the courthouse late Thursday afternoon.

All Detroit active workers and retirees will see no changes to their pension and health care benefits for the next six months, despite Thursday’s bankruptcy filing, Emergency Manager Kevyn Orr told the Free Press today.

But Orr’s plan to eventually cut pension benefits and health care to make up for massive pension debts — $3.5 billion in his estimation — has not changed.

When he arrived on the job in late March, Orr took control of a city with an estimated $17 billion in long-term debts and a $327 million annual budget deficit. On July 12, the city announced it would stop making payments on about $2.5 billion in unsecured loans and asked some of its creditors — bond issuers, unions and pensioners — to forfeit as much as 90% of what the city owed them in order to avoid bankruptcy.

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The majority of bankruptcies in the U.S. fall under Chapter 11 reorganization or Chapter 7 liquidation, which apply to individuals and businesses. Chapter 9 bankruptcies, like the one Detroit filed for, allow for the reorganization of municipalities and differ significantly from other bankruptcies. “A Chapter 9 bankruptcy is still a bankruptcy,” Pottow says. “Although it doesn’t have all the rules of Chapter 11.” After filing with a bankruptcy court, a debtor usually files a plan of reorganization, which the court must approve. The debtor then reduces its debts by paying back a portion of what it owes.

That’s where things get complicated for municipalities. Under Chapter 11, if a company can’t restructure, the proceeding moves to Chapter 7 — the company is liquidated, and the sale of the company’s assets goes to pay off creditors. But under Chapter 9, a court can’t order liquidation. “Such a liquidation or dissolution would undoubtedly violate the Tenth Amendment to the Constitution and the reservation to the states of sovereignty over their internal affairs,” according to an explanation by the U.S. federal courts.

Detroit’s situation seems almost unprecedented, and it’s not clear how the city can best respond to it. The unions’ biggest problem is that Detroit simply cannot pay their pension claims without destroying city services. Detroit doesn’t have the money to provide even minimal services to its current population while paying off the large numbers of retired workers, many of whom hail from times when the city was larger and richer.

Because there is no money, there is no solution that gives the unions the relief they seek. Total obedience to the state constitutional mandate might not be possible, and that’s a problem. The government can pass a law saying that everyone has a constitutional right to a free trip to the moon, but if it doesn’t build the spacecraft that can get you there the right is void.

While the principle that federal law trumps state law on most issues is pretty clear, there are real arguments on both sides in this complicated case. But if the state constitution is unenforceable as well as being in conflict with federal law, it would be that much harder for the state constitution to block the execution of federal bankruptcy law.

(Reuters) - With more than $18 billion at stake in Detroit's restructuring, big law firms and other advisers are clamoring to represent the city's many creditors - including some advisers not exactly known for municipal work.

The city, which filed the largest-ever U.S. municipal bankruptcy on Thursday, tapped high-priced lawyers from Jones Day, financial advisers from Ernst & Young and restructuring consultants from Conway MacKenzie, court papers show.

For creditors and related parties, there is clearly a lot at stake. That means bondholders, insurers, retirees and others are sure to be accompanied in court by platoons of lawyers.

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In corporate restructurings, creditors, judges and the Justice Department pore over fees line by line, and can raise objections to unnecessary or overpriced items. Over the past few years, the Justice Department has ramped up its policing of high fees and has required bankruptcy lawyers to disclose more.

In municipal bankruptcies, fees could be subject to disclosure under the Freedom of Information Act, but they do not need to be reported publicly in court.

"You're used to being in a world where you have to explain yourself, and suddenly you don't anymore," said a bankruptcy lawyer, who asked not to be named.

The catch is that, unlike in corporate bankruptcies, there is no mechanism under Chapter 9 to make the bankrupt entity pay certain creditors' fees. And corporate bankruptcies are generally more lucrative for advisers because there is often more money to go around.

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And a concurrent lull in corporate bankruptcies has put strain on big restructuring firms like Weil Gotshal, which last month laid off 170 associates and support staff, driving professionals toward municipal work.

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The case could be a boon for smaller law firms, too.

While large, corporate creditors are apt to tap similarly colossal law firms with whom they have preexisting relationships, smaller or locally-based stakeholders may opt to hire attorneys native to Detroit.

"There are a lot of talented lawyers in Detroit," Levin said. "I would think pensions and unions, for example, might opt for those guys."

I was feeling so sorry for the lawyers, who have been through a rough patch of late, having to scrape up bizarre theories to take to court, esp. with regards to class action suits.

Now a nice, juicy ten-of-billions bankruptcy where they can feast at a veritable fee buffet. Score!

Just a question - does anyone know if the Detroit pension funds held any GM paper and if so, how much? Any pension fund that held much in the way of GM commercial paper would have been hammered when the government decided to bail out the UAW at the expense of the bondholders.

__________________Anyone who cannot cope with mathematics is not fully human. At best he is a tolerable subhuman who has learned to wear shoes, bathe, and not make messes in the house.

Just a question - does anyone know if the Detroit pension funds held any GM paper and if so, how much? Any pension fund that held much in the way of GM commercial paper would have been hammered when the government decided to bail out the UAW at the expense of the bondholders.